Why are Rules of Origin putting a spanner in the works?
Rules of Origin (RoO) are putting a spanner in the works for UK exporters wishing to take advantage of the UK’s newly negotiated trade deals with the EU and all trade deals we had with the EU that have been rolled over. The new trade agreements only allow goods of UK origin to move tariff and quota free. Many UK exporters from a variety of sectors are finding that goods they thought they could export tariff and quota free do not meet the new origin rules putting their goods at a disadvantage compared to their EU competitors. The rules define which goods can be counted as originating in the UK and therefore benefit from the negotiated agreements.
So, why do we have RoO?
RoO are written into all trade agreements to ensure that reduced tariffs and other non-trade barriers covered by the agreement are only available to goods originating in the countries that have signed the agreement. If we did not have RoO then companies could just import goods into a country that has a trade deal with the country they want to trade with then just export the goods from that country even though the country that originally sent the goods does not have a deal with that country. For example, a US company wants to export to the EU, but the US and the EU do not have a trade deal. Without RoO the US company could export the goods to the UK and then on to the EU taking advantage of the UK EU trade deal.
The rules vary for each commodity code though in general if 50% of the ex works price is considered as originating in the UK then the goods would be considered to be of UK origin. For goods wholly originating on the UK this is not an issue but with modern supply chains parts come from all over the world. When we were a member of the EU then parts from EU counties counted towards the origin of the goods and in some agreements they still can as long as they processed in some way in the UK. This is called cumulation and is included in some format in most trade agreements. The issue UK businesses are having at the moment is that cumulation can only apply if the goods are processed and there is a list of minimal processes which do not change the origin of the goods. For example if Norwegian salmon is imported into the UK and then repackaged for the consumer market, then repackaging is considered a minimal process which does not confer origin, so the goods remain of Norwegian origin. If the same Norwegian salmon is imported into the UK and is smoked and then repackaged for the consumer market, then the salmon can be considered of UK origin.
These rules will have the effect of curtailing the UK from being a distribution centre for EU goods. It may make UK manufacturers look for UK suppliers to replace their existing EU suppliers, but EU manufactures face the same issue so may well replace there UK suppliers. In short RoO are an added barrier to trade that many UK exporters have not needed to consider before. Not all goods can move tariff and quota free between our trading partners.
The origin status of EU goods imported to the UK
If goods are imported from the EU to the UK then re-exported to the EU without being processed in the UK then the goods will not qualify as being of UK origin and therefor duty will need to be paid when exported to the EU.
The trade agreement only covers goods which qualify as being of UK origin as per the rules of origin which can be found in the annexes of the trade agreement here: https://www.gov.uk/government/publications/agreements-reached-between-the-united-kingdom-of-great-britain-and-northern-ireland-and-the-european-union
The same applies to EU goods being exported to the UK which must be of EU origin to qualify.
This has caused a lot of confusion and made the news https://www.bbc.co.uk/news/55648201 regarding M&S Percy Pigs.
The Government may try to change the rules at a later date but for now this is how they work per the agreement.
Rules of origin are going to be challenging for UK business to adapt to especially if they have only previously traded with the EU.
To clarify the regulations in the UK EU agreement, allow for preferential origin to be declared in two ways:
- Invoice declaration – The exporter puts a standard declaration on the invoice stating that the goods qualify as being of UK origin. To do this the exporter needs to be able to prove that the goods do indeed qualify.
- Importers knowledge – This is a relatively new concept for trade agreements, and it allows the importer to claim preference based on their knowledge of the goods. Again, they need to be able to evidence this by getting long term suppliers declarations from the exporters. Again, although the importer is making the claim the exporter will ultimately have to supply the evidence that the goods meet the rules.
There is no grace period regarding the above and one or the other has to be used now to claim preferential origin to benefit from the zero tariffs agreed in the agreement. However, there is a 12-month grace period for companies to get the evidence together to support these claims. From January 2022 customs authorities can ask for the evidence support the claims made in 2021 and going forward.
Rules of origin are an inevitable consequence of the UK leaving the EU single market and will put an admin burden on both UK and EU business. Some businesses will no doubt conclude it is easier and cheaper to pay the tariffs than keep the required paperwork. There is software commercially available that can help companies prepare the necessary Bill of Materials (BoM) as evidence that their goods meet the origin rules but of course these also come at a cost.
Without the UK re-joining the single market it is hard to see how this burden can be removed. Rules of origin are part of all trade agreements.
Returned Goods Relief is a possible solution to the issue. However, it will not work for all companies and creates additional paperwork.
You can read more about Returned Goods Relief here: https://www.gov.uk/guidance/pay-less-import-duty-and-vat-when-re-importing-goods-to-the-uk-and-eu